FRIDAY, APRIL 18, 2008
Looking at the Low Volume
04/18/08 3:20 PM EST
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As of: SPX 1389 |
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I've mentioned quite often over the years that I'm not at all a fan of using market-wide volume in the traditional sense. Many traders assume that high volume on up days is good, while high volume on bad days is bad. In terms of overall market volume, the opposite is usually true.
That's not necessarily the case for sectors and specific stocks, however, and volume patterns can prove valuable at times. Something that caught my eye today is the very low volume yet again in many of the broad-market ETFs. Low volume is not a typical condition on option expiration days, and it's doubly interesting given how much we've rallied today.
I checked for any time that the Nasdaq 100 trust (QQQQ) gapped up at least 1% to a new two-month high, but volume was below its 50-day average. Over the next three days, QQQQ was positive only 3 out of 11 times and had an overall average return of -2.4%. When volume was above its 50-day average, however, then it was positive 17 out of 27 times and had an average return of +0.6%. Quite a difference there.
Volume today looks like it may come in more than 25% below its 50-day average, so I re-ran the test with that parameter. That only came up with three instances (11/26/99, 3/24/00 and 11/29/02, which were around holidays) and QQQQ was lower three days later each time by an average of -4.6%.
Given the studies we went over earlier today, it seems the chances of seeing some weakness early next week are higher than average. We have mostly met the conditions for a trend day today as we discussed earlier this morning, so I don't expect us to break down before the close. We may not even see that much weakness in the short-term anyway, but with the S&P 500 approaching that 1400 area, a smattering of overbought technical readings from indicators like the Relative Strength Index, and the studies we've gone over today, the chances for meaningful sustained upside seem remote (in the short-term).
Two Trend Days in a Week?
04/18/08 11:45 AM EST
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As of: SPX 1346 |
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On Wednesday, we went over the qualifications I use to determine whether we were likely to see a trend day or not. This can be useful, as it tells us the probability of the market closing at or near the day's highs.
Today isn't quite as clean as Wednesday, but so far it still qualifies. We had a big gap up open, buying interest has come in when the NYSE TICK approaches zero, breadth is strong and we've hit new intraday highs after the first hour of trading.
I ran some tests this morning to see what has happened in the past when the indices gap up at least 0.5% from the previous close, breadth on the NYSE is better than +1800 at 11:30am EST (meaning 1800 more stocks are higher than yesterday's close than below), and the indices have made a new intraday high during the past half-hour.
Buying at 11:30 and holding until the close resulted in 7 winning trades out of 10 attempts for the Nasdaq 100, with an average return going into the close of +0.8%. The three losers were -0.1%, -0.1% and -0.1%, so obviously we didn't see any big reversals out of those 10 occurrences. None of them occurred on an option expiration day.
For the S&P 500, it had 5 winners out of 6 attempts, with an average return into the close of +0.6%. The one loser was -0.2%.
This contrasts with the tendencies I mentioned earlier about large gaps in the Nasdaq on option expirations and after Google earnings, so we've got quite a battle of biases here. I still think that the chances of us seeing a lot of sustained upside from the opening prices is limited, but given how well we've held up so far this morning and the strong breadth, I'm even less inclined to try selling short now.
About the only scenario that would have me interested in that at this point is if the S&P 500 pushes up to 1400ish near the close. The S&P has shown a negative return 73% of the time since 1982 on the day following April option expiration, we'd be very overbought by that time on a number of different short-term technical indicators, and I think the probability of the index failing on its first attempt to breach that 1400ish area will fail (in the short-term, at least).
Also, I checked to see if there's ever been a time when the S&P 500 had two "gap and go" days within a week, determined by looking for opening gaps of +1% or more and a close higher than the open.
It's happened 9 times going back to 1993, and the S&P was positive one, three and five days later only 3 of those times.
Bottom line, it looks to me like the very short-term negative biases we had at the open have been at least partially negated by the trend day qualities we've seen so far this morning, making me even less in a mood to try shorting. But if we hold up into the close, the likelihood of some weakness early next week looks stronger than average.
The Tape Gets Googled
04/18/08 9:10 AM EST
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As of: SPX 1346 |
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Good Friday morning...We begin the day with a robust open as Google continues to climb ever higher since their release last night (trading at 532 as I type) and Citigroup helps the cause, currently up about 7% pre-market.
Out of the last 16 Google earnings reports, the Nasdaq 100 (NDX) has gapped up the following morning 12 times. After those gaps up, the NDX was able to gain from the open to the close only 2 times, and sported an average return of -0.8%. From that open to the next day's close, it was positive only 3 times, with an average of -0.7%. Following that, the returns were more in line with random.
We also have option expiration today. Over the history of the Nasdaq 100 tracking fund (QQQQ), it has gapped up on the morning of an option expiration 15 times. Buying the open and holding until the close resulted in only 2 winning trades and an overall average return of -0.9% (the two winning trades were +0.1% and +0.3%).
Holding through the following Monday's close upped the winners to 6 out of 15, but the overall average return actually dropped to -1.6% as the average losing trade (-3.6%) swamped the average winning trade (+1.3%). The S&P 500 has gapped up 1% on an option expiry day only 3 times, with two losers and one winner (the dates were 1/16/98, 1/19/01 and 8/17/07).
I checked one more pattern, this one being when the NDX gapped up at least 1% and continued higher during the day (like Wednesday), then had a consolidation day, then gapped up again at least 1%. Buying that open and holding 'til the close resulted in 3 winning trades out of 8 attempts and an overall average return of -0.5%. Holding until the next day's close also showed 3 winners and the average return sunk to -0.9%.
As we've been discussing since earlier this week, my preference had been to buy weakness, especially in technology, for a variety of reasons we went over during the past several days. But with the NDX gapping up right up to its April highs, and the statistics we went over in the paragraphs above, I don't have real high hopes that we're going to see a lot more sustained upside from here, at least in the short-term, so I'll be looking to pare back some of the longer-term positions we'd bought for accounts during the past couple of weeks.
As for shorting, I'm not a huge fan of the idea given my still at-least-moderately-bullish intermediate-term view, but I'm looking at the potential if the S&P squirts up to 1400ish today or Monday morning, or possibly on the NDX if we gap up above the April highs today, then fall back below.
All the best,
Jason Goepfert
President and CEO
Sundial Capital Research, Inc.
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